Is Buffett up to no good when he praises indexing?

In his recent letter to shareholders, Warren Buffett said if someone invested $10,000 in an index fund back in 1942, it would be worth $51 million today. For purposes of this post we'll assume he is correct. There were a lot of reactions to this on Twitter. One jokey Tweet said that anyone old enough to have $10,000 back then would be dead by now. Another Tweet jumped on Buffett, saying that if he believed in indexing as he often talks about, then he'd do it. The person said he is not taking the medicine he prescribes. I'm sorry I don't have a link to the Tweet, I just scrolled past it but a couple of hours later I was still thinking about it, I looked but couldn't find it.

I have a different take than the implication that Buffett is talking out of both sides of his mouth. There are many valid ways to successfully invest in the capital markets. If you look you will find books and articles about how to buy stocks that have fallen out of bed be it on bad news or a slow deterioration (Buffett did this with some financials in the fallout from the financial crisis) and on the flip side you can find just as much content about why it makes sense to buy companies breaking out to new highs. Both work at times and both lag at times but more importantly, both are valid long term approaches. I personally don't find doing one exclusively to be optimal. That one person can think they are valid strategies but not necessarily optimal can coexist.

Who in their right mind would say that indexing is not a valid investment strategy? Of course it is valid. That doesn't mean there are not drawbacks, there are. Also, like any other strategy, indexing will at times look pretty good while at other times it will look lousy. I don't believe indexing to be optimal for a long list of reasons I've written about many times over the years but have always said it is valid. Over someone's investing lifetime, assuming an adequate savings rate, a suitable asset allocation and the avoidance of truly stupid behaviors, an indexing strategy has a very high likelihood of growing into a sustainable piece of money for retirement. Buffett himself has had periods where he has lagged and outperformed. For the last two years Berkshire Class B Shares have lagged the S&P 500 but for five years they've outperformed. Yahoo Finance has BRK-B up 64% for the last five years while the S&P 500 is up 49% on a price basis. That 49% is enough to get the job done when looked at for such a small period, it just so happens that Buffett's active strategy did better.

Buffett has also talked about the value of time in the context of indexing, like put it in an index fund, don't worry about it and go enjoy yourself. There's something to that. If you put every nickel into an index fund and don't look at it for five years you are very likely to be quite pleased when you do look (there are a few exceptions but not many). You certainly would have avoided any stress in that five years about any short term blips. Think about this, in 1987, the stock market was up about 3%. Someone who'd never checked their account or the news in that year might have thought it was a very ho hum year.

The idea of not looking of course isn't practical for retired people using their portfolio to supplement some of their income and arguably it may not be practical for people in the accumulation phase of their career but it makes the point of less (trading and worrying) often being more and that is the bit of process from Buffett that can be widely applicable.

The Tweeter above is free to assume something nefarious from Buffett as are you but I'm not sure there's a benefit to that.